JPMorgan Chase and Goldman Sachs are seeking to sell their metal warehousing units just three years after their controversial entry to the industry, even as a proposed rule change by the London Metal Exchange is likely to reduce the attractiveness of the business.

The two US banks got in to the niche warehousing business in 2010 at a time when a build-up in stocks following the financial crisis had triggered a boom for storage companies. But their ownership of warehouses struck a nerve when metal users began complaining that warehousing companies were profiting from bottlenecks in the system that have distorted prices.

Both banks have informally started sounding out buyers for their warehousing subsidiaries in recent months, people familiar with the matter told the Financial Times. Many investment banks are scaling back their ambitions in commodities because tougher regulations, greater competition and lower volatility have hit profits. The Federal Reserve is also weighing whether banks should even be allowed to own physical commodities infrastructure, such as warehouses.

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The planned sales also coincide with a new LME rule proposed this month that could cut in to a major source of profits for the warehousing industry.

"The LME has cratered the valuations of these companies," said one rival trading house executive.

The LME's proposed rule change takes aim at bottlenecks that slow the delivery of metal out of their sheds.

When warehouses are full, as they are now, long queues develop to move metal from one location to another. The delays have been profitable for warehouse owners because they continue to receive rent until metal actually leaves. They have tended to use the stream of revenue from the queues to offer incentives that attract more metal and maintain large stocks at just a few locations.

But the LME's new rule would prevent this practice, in effect forcing stocks at the most dominant warehouses to be drawn down and cutting into the rent paid. Other warehouse owners with large LME stockpiles, including traders Glencore and Trafigura, would also be affected.

The proposal, which is open to consultation until September, marks a step forward in the LME's effort to address the warehousing situation following its acquisition by Hong Kong Exchanges & Clearing in December. Before that, the LME was owned by banks and brokers, with JPMorgan and Goldman as the two largest shareholders.

Goldman has been sounding out buyers for several months for its warehousing unit, Metro International Trade Services, which it bought for roughly $540 million in 2010. Several industry executives said that if the new rules were implemented its value could be as little as half that.

JPMorgan has more recently initiated a sales process for its warehousing unit, Henry Bath, although the discussions began before the LME's announcement, people familiar with the matter said. It has also discussed selling some of its physical metal trading book, although there is no direct link between the two deals, the people added.

The profitability of Henry Bath, one of the oldest names in commodity markets, founded in Falmouth, England, in 1794, has declined sharply from $114 million in 2009 to $28 million in 2011, according to Companies House filings. JPMorgan acquired the company as part of its $1.7 billion purchase of a large chunk of Sempra Commodities from Royal Bank of Scotland in 2010.

Goldman and JPMorgan declined to comment.
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